Equity Research Report
Oracle Corporation
Submitted By:Saquib Ali
1
Table of Contents
INTRODUCTION ..................................................................................................................... 3
Company Profile .................................................................................................................... 3
Structure ................................................................................................................................. 3
Products.................................................................................................................................. 3
Strategic Initiatives ................................................................................................................ 4
Growth Strategy ..................................................................................................................... 4
SWOT Analysis ..................................................................................................................... 4
TREND ANALYSIS ................................................................................................................. 7
Current Assets ........................................................................................................................ 7
Total Assets ............................................................................................................................ 8
Revenues ................................................................................................................................ 9
Cash Flow ............................................................................................................................ 10
Net profit .............................................................................................................................. 11
STANDARDIZED FINANCIAL STATEMENTS TRENDS ANALYSIS ............................ 12
RATIO ANALYSIS................................................................................................................. 14
Operating Profitability Ratio................................................................................................ 14
General Profitability Ratios ................................................................................................. 14
DuPont Analysis .................................................................................................................. 15
Leverage Ratios ................................................................................................................... 16
Earnings and Cash Flow Coverage Ratios ........................................................................... 17
Inventory, Receivables and Payable Periods ....................................................................... 18
Operating and Cash Conversion Cycle ................................................................................ 18
Liquidity Ratios ................................................................................................................... 19
Market Valuation Ratios ...................................................................................................... 20
Analyzing Growth Potential ................................................................................................ 21
WEIGHTED AVERAGE COST OF CAPITAL ..................................................................... 22
DIVIDEND GROWTH MODEL ............................................................................................ 22
REFERENCES ........................................................................................................................ 23
2
VALUATION OF ORACLE CORPORATION
INTRODUCTION
Company Profile
Oracle Corporation is a multinational company, founded in 1977, by Larry Ellison (current
Chairman), Bob Miner and Ed Oates. Headquartered at California, U.S.A., Oracle is the third
largest software manufacturer (by revenue) after Microsoft and IBM.[1] It has 122,458
employees and over 400,000 customers in 145+ countries.[2][3] It is traded as ‘ORCL’ in the
New York Stock Exchange and is also a part of the S&P 500 index. S&P has given it an A+
credit rating.
Structure
Products

Oracle Cloud Solutions
3

Oracle Database

Oracle Operating Systems(Solaris and Linux)

Oracle Business Analytics

Oracle Middleware(Fusion)

Oracle Engineered Systems

Oracle Servers

Oracle Consulting and Financing[3]
Strategic Initiatives
Exadata: Oracle and Accenture have got together for a strategic initiative which involves
bringing the performance and flexibility of Oracle Engineered Systems to customers, faster
and in a cost-effective manner. Accenture has incorporated Oracle Engineering Systems into
its consulting and outsourcing services. This allows customers to manage, process and
analyze large amount of digital data along with reducing the total cost of data center
ownership through integration of servers, storage and networking components.[4]
Growth Strategy
Acquisitions: Oracle has been very active in acquiring companies in order to aid its growth.
In the past 3 years, it has acquired companies worth about 25 billion dollars (38 Firms). This
has led to a 26% rise in its earnings and there has been a 64% rise in the company’s stock
price since 2005. [5]
Business Partnering: Oracle has more than 25,000 business partners and they have played an
important part in the company’s success. Partnering allows oracle to tap the markets which is
otherwise would not be able to. It expands its reach into other segments like hardware, cloud
etc.
SWOT Analysis

Strength
1. Oracle research and development capabilities can be highlighted as one of its main points
of competitive edge. Specifically, the company successfully operates Oracle Labs where a
wide range of projects have been developed that contribute to the competitive edge of the
company.
4
2. Inorganic growth strategy that has enabled the company to achieve its current status and
the robust market positioning of the brand. Moreover, the company has a strong and
charismatic leader in the personality of Larry Ellison.
3. the takeover of Sun Microsystems by Oracle considerable enhanced the position of the
company in the global marketplace and the same time as increasing the ranges of products
and services offered by Oracle,

Weakness
1. The lack of Oracle presence in Asian marketplace can be considered as the weakness of
the company due to the fact that the role of Asian businesses are growing in the
international business arena, at the same time when US and European countries are faced
with serious financial issues.
2. Moreover, heavy reliance on partnerships and alliances rather than direct market entry in
terms of engaging in international market expansion limits the level of Oracle control of
international operations.

Opportunities
1. Increasing the presence of the company in Chinese and Indian markets, increasing the
market share of the company through the growth of global enterprise software market.
2. Generating additional solid revenue for the company in the future through increasing the
level of investment on the development of virtualization software programs.
3. The company can achieve long-term growth through sophisticating its data storage
services taking into account dramatically increasing demand for this type of service, and
also research and development initiatives can be launched with the aim of developing
innovative business applications for various types of devices.

Threats
1. The major threat for the company is the emergence of new competitors from China, India
or any other evolving superpowers from the East. This is because Oracle would find it
challenging to compete with such a competitor on prices taking into account the access of
competitors to considerably cheaper resources, including human resources in China and
India.
5
2. According to Wall Street Journal, Oracle CEO Larry Ellison is known for using ‘dirty
tricks’ that included hiring people to examine the garbage from Microsoft with the aims
of finding any evidences against their wrongdoing. There is a threat that such tactics
might be repeated in the future and which might result in company image being damaged.
6
TREND ANALYSIS
Current Assets

Over 10 years we can see a smooth increase in the current assets. The cash, cash
equivalents and Marketable Securities have shown a constant increase over the years. The
company has shown a positive growth as the cash reserves are increasing over 10 years.
The percentage change is the current assets is quite hazardous as its falling and rising at a
very steep rate.

Other current assets has also shown a constant growth except in the year 2009 where we
can see a drop in the current assets because the prepaid expenses was low in the fiscal
year.

The accounts receivable is also constantly increasing over 10 years except over the year
2009 which shows that the collections of unpaid accounts was high in the fiscal year.
Total Current Assets
60000
50000
40000
30000
20000
10000
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
7
Percent Change in current assets
50.00%
45.00%
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Total Assets

Over 10 years the assets are increasing constantly. The percent increase in the total assets
in the fiscal year 2009 was less due to the decrease in accounts receivable, other current
assets and also the subsequent decrease in the spend on the machinery and equipment.
Another account that was decreased in the year 2009 was the deferred tax asset. In the
year 2009 we can see the growth rate went down drastically but it improved in the coming
years.

The intangible assets account was also decreased due to decrease in the spending in the
software and patent rights. Therefore, the innovation of the company has decreased in the
fiscal year 2009.
Total Assets
100000
90000
80000
70000
60000
50000
40000
30000
20000
10000
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
8
Percent Change in Total Assets
45.00%
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
The overall trend we can see that the company is on a growing track over 10 years in the
assets account and the company has a positive growth.
Revenues
The revenues are increasing constantly and the percentage of growth is high from the year
2005 to 2011. But in the year 2012 to 2014 the growth in the revenues has declined. The
decline may be due to the decreasing demand in the market and the increasing competition
from the new born companies which has led to shifting of revenues. Due to this reason the
company might have decreased the prices of their product which has decreased the overall
growth in the revenues. This percentage decrease in the growth can be increased by
innovation and adapting new technologies.
Revenue
45000
40000
35000
30000
25000
20000
15000
10000
5000
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
9
Change in Revenue
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
We can clearly see from the graph that the last 3 years the percentage growth is very less.
Cash Flow
Over 10 years the cash flow is increasing and decreasing. The operating cash flow is
constantly increasing over the years. The cash flow from investing is also increasing over the
year which shows that the company is continuously investing in plant, machinery and
equipment. The cash flow from financing is majorly increasing and decreasing over the years.
The years in which the company has issued dividends and has taken long term loans the cash
flow is positive, otherwise the cash flow is negative in other years. This shows the major
change in the cash flow is due to the financing activities of the company.
Net Change in Cash
7000
6000
5000
4000
3000
2000
1000
0
-1000
2005
2006
2007
2008
2009
2010
2011
2012
2013
-2000
10
Net profit
From the trend we can clearly see that the profits for the company has increased
over the
years. But as the percentage increase in the revenues has decreased in the last 3 years a
similar impact was on the net profit. The cost of goods sold was decreasing from the years
2012 which has reduced the impact on the profits due to decreased growth in revenues.
Overall the company has a good profit account, therefore, some technological and innovative
changes may lead to better revenues and profits for the company in the coming years.
Net Income
12000
10000
8000
6000
4000
2000
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Change in Net Income
45.00%
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
From the graph above we can see the growth in net profits has gone down from the year 2012
because of the above stated reasons.
11
STANDARDIZED FINANCIAL STATEMENTS TRENDS ANALYSIS
Cost of
Goods Sold
Operating
Expense
EBIT
Common Size Income Statement Analysis (% of Sales/Revenues)
0.50
0.45
0.40
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
Interest on
debt
EBT
2005
2006
2007
2008
2009
2010
Year
2011
2012
2013
Cost of
Goods Sold
Operating
Expense
EBIT
Common Size Balance Sheet Analysis (% of Assets)
0.25
0.23
0.20
0.18
0.15
0.13
0.10
0.08
0.05
0.03
0.00
Net
Income
2014
Interest on
debt
EBT
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Operating Expenses are close to 45% of the total revenue in most of the years and has the
maximum weightage amongst all the other parameters.
The COGS has been decreasing in the past 4 years which is a positive sign.
Oracle has been functioning at minimal debt as compared to the total revenue
The difference between EBIT and EBT has been growing every year showing an increase in
interest expenses every year.
Variable difference between Net Income and EBT shows varying taxes every year.
EBIT(1-T)
Select Valuation Cash Flow Items ( % of Sales)
0.39
0.35
0.31
0.27
0.23
0.19
0.15
0.11
0.07
0.03
-0.01
-0.05
CAPEX
CHANGE
IN WC
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
FREE CASH
FLOW TO
FIRM
(FCFF)
The FCFF has been increasing from 2010 to 2013 given the high increase in growth rate of
EBIT and comparative lower increase in working capital and capital expenditure.
12
Capital expenditure has been decreasing from 2005 to 2008 and then increasing from 2009 –
2011.
Both Capital Expenditure and change in Working Capital are minimal as compared to the
revenue
13
RATIO ANALYSIS
Operating Profitability Ratio
Operating Profitability Ratios
0.9000
0.8000
0.7000
0.6000
0.5000
0.4000
0.3000
Gross Profit
Margin
Operating
Profit
Margin
2005

2006
2007
2008
2009
2010
2011
2012
2013
2014
Gross Profit Margin
The Gross profit margin has been pretty constant through the 10 years with 2014 having the
best value at 80.19%. There has been a growth in revenue of 224% from 2005 and the COGS
has increased only by 172% thus leading to a growth of 4.5% in the gross profit margin since
2005. The gross profit has increased by 239.29% since 2005.

Operating Profit Margin
The operating profit margin has been hovering around the 36% mark and has reached its
highest point in 2013 with 39.49%. The 239.29% growth in gross profit was matched by a
217.59% growth in operating expenses which resulted in a growth of 13.12% growth in the
operating Profit Margin.
General Profitability Ratios
General Profitability Ratios
0.67
Return On
Asset
0.57
Return On
Capital
Employed
Return On
Owner's
Equity
0.47
0.37
0.27
0.17
2005

2006
2007
2008
2009
2010
2011
2012
2013
2014
Return On Asset
The return on asset has been declining since the past few years and 2014 has seen the lowest
ROA at 42.37%. The reason for the decline is the levels of inventory Oracle has started
maintaining since 2010. Before that they used to maintain no inventory at all. The second
14
reason for the ROA going down is a 244% increase in intangible assets since 2005 and they
are growing at an average of 15.7%. In all the Net Income growth of 78.5% in the last 5 years
has been offset by a combined growth of 90.53% growth in Total Asset(which are much
greater in value than the net income).

Return on Capital Employed
There has been a steady and minimal decline in ROCE. This is mainly because the total
assets have growth at a higher rate than the EBIT or the Current Liabilities. There has been a
decline of 39% in the 10 years. However rate of decline in the past 5 years has been much
slower at 10.6%. The decline has been slowed down due to increase in the Total Tax Payable
from 2010 onwards, due to which there has been an increase in the current liabilities.

Return On Owner’s Equity
The return on owner’s equity has been constant over the years. The Net income growth rate
has been nullified by the equal growth rate of the retained earnings and the common stock.
Common Stock and Retained Earnings make up 80% of the Owner’s Equity.
DuPont Analysis
Return on Equity = Tax Burden x Interest Burden x EBIT Margin x Asset Turnover x
Financial Leverage
5 Stage DuPont Analysis
2.1000
1.9000
Tax Burden(1-Tax
Rate)
1.7000
Interest
Burden(EBT/
EBIT)
EBIT
Margin(EBIT/
Revenue)
Asset Turnover
1.5000
1.3000
1.1000
0.9000
0.7000
0.5000
0.3000
0.1000
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
15

Tax Burden(1-Tax Rate or Net Income/EBT)
The Tax Burden has been fairly constant through the 10 years. In the last 5 years it has been
increasing at the rate of 2.29% per year and hence pulling down the ROE.

Interest Burden(EBT/EBIT)
The interest burden has also fallen by 7.8% in the last 10 years which shows an increase in
the interest expenses of Oracle which means it is taking more debt or the interest rates are
increasing. This is pulling the ROE down.

EBIT Margin (EBIT/Revenue)
The revenue has been increasing at an average of 14.5% every year and the EBIT has been
increasing at the rate of 16 % every year. Since EBIT has been growing at the faster rate, the
EBIT Margin has been increasing in the last 5 years hence pulling up the ROE.

Asset Turnover
Asset turnover has decreased by 22% since 2005 and is continuing to decrease. This is
happening since the total assets are increasing at a higher rate than the revenue. This is
pulling the ROE down.

Financial Leverage
As compared to the other components, the financial leverage is very high and it pulls the
ROE upwards. This shows that the total assets are greater than the total owner’s equity. It is a
component that has the maximum fluctuations and since it is the largest component, it affects
the ROE the most. This has put increasing since the past 3 years.
All in all Financial Leverage and EBIT margins are increasing and the rest of the factors are
decreasing. The decreasing components are decreasing at a higher rate that the ones which
are increasing hence leading to decrease in ROE.
Leverage Ratios
Leverage Ratios
0.70
Debt
Equity
Ratio
0.60
0.50
0.40
0.30
0.20
0.10
2005

2006
2007
2008
2009
2010
2011
2012
2013
2014
Long
Term
Debt to
Total
Capital
Debt Equity Ratio
16
Oracle is financing itself majorly by long term debts. The average growth rate of long term
debts is 20% and that of Equity is 18% thus resulting in an overall increase of DE ratio by
276% since 2005. The great increase in debt puts the company at a high risk and more
volatile earnings

Long Term Debt to Total Capital
As discussed above the rate of growth long term debts is more than equity and hence the long
term debt to total capital ratio has been increasing over the years with a similar trend as the
DE ratio.
Earnings and Cash Flow Coverage Ratios
Earnings and Cash flow coverage ratios
35.0000
Interest
Coverage
Ratio
30.0000
25.0000
Cash Coverage
Ratio
20.0000
15.0000
Fixed Financial
Cost Coverage
10.0000
2005

2006
2007
2008
2009
2010
2011
2012
2013
2014
Interest Coverage Ratio and Fixed Financial Cost Coverage Ratio
The Interest Coverage Ratio and Fixed Financial Cost Coverage Ratio are same for oracle
since the balance sheets do not mention anything about the lease payments. Oracle currently
maintains a very healthy Interest coverage ratio of 16.14 and is more that capable of paying
out its interest expenses, thanks to its high EBT.

Cash Coverage Ratio
Oracle also maintains a healthy Cash Coverage Ratio of 19.23 and hence is in a healthy
position to pay out all their interest expenses. The is presently declining due to decrease in
depreciation expenses which have fallen by .7% in the last year. Furthermore, EBIT has
increased only by .5% hence further reducing the Cash Coverage.
17
Inventory, Receivables and Payable Periods
Inventory, Receivables and Payable Periods
80
Inventory
Period
70
No. Of Days
60
50
40
30
20
10
0
2005

2006
2007
2008
2009
2010
2011
2012
2013
2014
Average
Receivable
Collection
Period
Average
Payables
Period
Inventory Period
Until 2010, Oracle used to have no inventory. After that they have an inventory cycle of
around 10.35 days which is a very good number as they can clear their inventory very soon.

Average Receivable Collection Period
The average receivable collection period has been declining in the past few years which is
good sign as they are generating cash flows quicker and they can invest the cash flows into
other profitable assets. It has been decreasing at the rate of 2% every year which is a good
sign.

Average Payables Period
During 2010 just after the financial crisis, Oracle dint want to lose out on cash at this crucial
juncture and hence due to its past reputation, its suppliers agreed to increase its payable days
to a large extend. After that the payable days have always been on the lower side, hence
showing its financial strength.
Operating and Cash Conversion Cycle
Operating and Cash Conversion Cycle
No. of Days
100
80
Operating
Cycle
60
40
Cash
Conversio
n Cycle
20
0
2005

2006
2007
2008
2009
2010
2011
2012
2013
2014
Operating Cycle
18
The has a short operating cycle 72.8 days at an average in the past 10 years which is quiet
short and healthy. Its continuous process innovations are steadily decreasing the cycle cyle
and it has reduced by 10 % in the past 5 years.

Cash Conversion Cycle
Oracle currently has a cash conversion cycle of 45 days which is very good compared to the
industry average of 48 days. The sudden blimp in the cash conversion cycle in 2010 is due to
Oracle holding its payables for a longer duration as discussed above.
Liquidity Ratios
Liquidity Ratios
3.6
3.2
2.8
2.4
2
1.6
1.2
0.8
0.4
Current
Ratio
Quick
Ratio
Cash
Ratio
2005

2006
2007
2008
2009
2010
2011
2012
2013
2014
Current Ratio
Majority of Oracle’s current assets are from Cash & Cash Equivalence and Marketable
securities. These 2 components for around contribute around 70 % of the total current assets
at an average. They have grown at an average of 28% every year and hence the current ratio
has growth rapidly, crossing the 3:1 mark in 2013.

Quick Ratio
The big difference between current ratio and quick comes from the fact that current assets
comprise of close to 40% of marketable securities. When this large chunk is removed, the
quick ratio falls massively below the current ratio.

Cash Ratio
There is not much difference between the quick ratio and the cash ratio since trade Oracle
hardly has any trade receivables. At an average, over the ten years, trade receivables form
only 20% of total current assets. This shows how safe Oracle it is for investors since there is
high liquidity.
19
Market Valuation Ratios
Market Valuation Ratios
Market to
Book Ratio
30
25
Price
earning
Ratio
Earning
Yield
Ratio(in %)
Price/ Sales
ratio
20
15
10
5
0
2005

2006
2007
2008
2009
2010
2011
2012
2013
2014
Market to Book Ratio:
The Company over last 10 years has a P/B ratio of more than 1. This shows that it has a good
return on investments. For the last 3 years the P/B ratio has been constantly been around 3,
comparing against the value of 4-6 in the previous years. This gives a clear indication that the
return on investments for the investors is declining. The reason may be less growth in profits
and revenue. The return on equity is showing the same trends. Therefore, we can say that the
value of the company is quite apt in the market.

Price Earnings Ratio
This ratio tells that how much an investor is willing to invest on $1 of earnings. Therefore,
we can see over the years that the P/E ratio has been increasing and is the highest in the last 3
years which shows that the investors are ready to invest on per unit of earnings. The reason
for high investment is that they have expectations high future returns.

Earning Yield Ratio
The 10 year treasury yield of Oracle is 3.02. As the current Earning yield ratio is less than the
10 year treasury rate, we can deduce that the stocks are overvalued for the last 5 years as the
earnings yield ratio is quite low. If we consider the previous years, then the treasury rate was
optimum to the earnings yield ratio and the stocks were of the optimum value. Therefore, the
company is earning on an average around 3-4% for its every dollar spent.

Price/ sales Ratio
The Company for the last 10 years have a P/S ratio of around 4. The P/S ratio is average and
investing in the company may or may not be a good idea. As the P/S ratio of the company is
decreasing over the years which seems to be a positive sign but as the long term debt is quite
20
high, this might also be a reason of a low P/S. As the long term debt is quite high the P/S
ratio is low and the company may be on a verge of bankruptcy. Therefore, in the current
scenario investing in the company may not be a good idea.
Analyzing Growth Potential
Analyzing Growth Potential
1.10
1.00
0.90
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
Growth
rate (g)
Percentage
of RR
DPO
2005

2006
2007
2008
2009
2010
2011
2012
2013
2014
Growth Rate
Oracle is a company which is constantly growing. However there have been fluctuations in
the growth rate of the company. From 2005 to 2008 Oracle paid no dividends. Hence the
ROE was the only component which affected the growth rate. From 2010 onwards there was
constant growth until 2013. In 2013 – 2014 ROE fell by 1.9% resulting in a drop in growth
rate.

Dividend Pay-out Ratio
Oracle did not pay any dividends from 2005 – 2008 and hence the ratio is 0 for those years.
For the rest of the years, there was a lot of fluctuations in the % of retained earnings as a
results DPO went down till 2013 and then shot up suddenly in 2014 when there was a 4 times
hike in the total amount of dividends paid.
21
WEIGHTED AVERAGE COST OF CAPITAL
*All values in Million $
Oracle doesn’t have any Preferred Stock hence P/V = 0
Therefore:
WACC = E/V x ke + D/V x kd
Volume(V) = Total Equity( E) + Total Debt(D)
V = 46878 + 24175 = 71053 M $
E/V = 46878/71053 = 0.6597
D/V = 1- E/V = 0.3402
ke= Rf + B(Risk Premium)
Rf(30 year US T-Bill Rate) = 2.36%
Risk Premium (US) = 5.75%
B = 1.24
ke = 2.36 + 1.24 x 5.75
ke = 9.49
kd( Long Term Oracle traded bond Rate – Maturity 2044) = 3.72
Tax Rate for the year = 20.06%
kd(1-t) = 3.72 x 0.7994 = 2.9737
WACC = (0.6597 x 9.49) + (0.3402 x 2.9739)
WACC = 7.272
DIVIDEND GROWTH MODEL
Selling Price of the Stock(Po) = (Dividend in Current year(Do) x (1 + growth rate(g)))/
(Required Rate of return( R) – Growth Rate)
R = Risk Premium – Risk free Rate = 5.75 – 2.36 = 3.39%
Po = (0.48 x (1 + 0.1966))/(0.0339 – 0.1966))
Po = 0.5743/0.01621 = $ 35.42
22
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(2014). Explore
the
data. PwC.
Retrieved
24
December
2014,
from
http://www.pwc.com/gx/en/technology/publications/global-software-100-leaders/compareresults.jhtml
Oracle.com,. (2014). Oracle | Hardware and Software, Engineered to Work Together.
Retrieved 24 December 2014, from http://www.oracle.com/
Gurufocus.com,. (2015). 10 Year Financial Data of Oracle Corporation (ORCL) GuruFocus.com. Retrieved 26 January 2015, from
http://www.gurufocus.com/financials/ORCL
Newsroom.accenture.com,. (2013). Accenture Newsroom: Accenture and Oracle Launch
Strategic Initiative to Deliver Data Center Transformation Solutions Based on Oracle
Engineered Systems. Retrieved 26 January 2015, from
http://newsroom.accenture.com/news/accenture-and-oracle-launch-strategic-initiative-todeliver-data-center-transformation-solutions-based-on-oracle-engineered-systems.htm
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